Economic Realities Must Drive SMME Support

When I received an invite to attend the State of the Nation Address (SONA), I quickly accepted because like all South Africans, I expected some fireworks from this year’s instalment. I was also interested in how the president would deal with the issue of electricity and whether he would give tangible initiatives to ignite this lethargic economy. I was particularly interested to hear more about initiatives to help support entrepreneurs and small businesses. I obviously got a lot more than I bargained for, both on and off the field, so to speak.

So what did the president have in his bag of goodies for entrepreneurs and small business? Not much, I’m afraid.

Notwithstanding that ‘support for small businesses’ featured as one of the key issues raised by South Africans who participated in the president’s campaign calling for submissions into SONA 2015, the address in itself was rather thin on this crucial subject and somewhat out of touch with current realities.

SONA 2015 was largely dedicated to what many may say are more pressing matters like the energy challenge (not a ‘crisis’, of course), labour stability, challenges related to the mining industry, and the president’s nine-point plan “to ignite growth and create jobs”.

Coming in at number 7 of the plan was “unlocking the potential of SMMEs, cooperatives, townships and rural enterprises”. This got me really excited. As the president made his way through the first six points of his plan, I waited with bated breath and great anticipation for more details on how the government was planning to unlock this potential.

The details never came.

The only reference made to small business related to the funds that have been established by state-owned development finance institutions to support entrepreneurs and SMMEs. It was reported that the National Youth Development Agency (NYDA) had disbursed a meagre R25m to 765 youth-owned micro enterprises in the last financial year.

The president then made reference to the NYDA, Industrial Development Corporation (IDC) and Small Enterprise Finance Agency (SEFA) R2.7bn Youth Fund partnership, with SEFA putting up R1.7bn of the funding and the IDC contributing R1bn. This partnership was initially announced in August 2014.

The fact that the NYDA has disbursed an average of R33 000 per SMME is nowhere close to adequate support and is no reason for celebration. Setting up a R2.7bn fund is one thing. Disbursing these funds to deserving and qualifying businesses is another. It’s been six months since the launch of the partnership between the NYDA, SEFA and IDC. I expected a more detailed update on progress made by this fund, not just a regurgitation regarding its establishment.

Anyone who has met SEFA CEO Thakhani Makhuvha will tell you about a man who is passionate about his job. He is clear about the role of SEFA in a developmental economy and doesn’t try to compete with banks and other lenders. He stresses the “greater than normal risk” that SEFA takes on in providing entrepreneurs with loans ranging from R500 to R5m in value. Most of his applicants have no security and his organisation does not mind that. There is, however one requirement: the business must be “sustainable”.

The availability of capital for small businesses is not, in itself, enough to support entrepreneurs and SMMEs – especially in the current tough economic times that the president so accurately captured in the opening remarks of his address.

It is no secret how much pressure the South African consumer has been under in recent times. A tough 2014 saw our GDP grow by a depressing 1.4% and the spectacular failure of African Bank, the largest unsecured lender in the country, as consumers struggled to service debts raised to fund consumption. Until recently inflation has hovered just under the 6% mark, the rand has remained weak against major currencies, and the mining industry has had a torrid three years with the latest threat coming from extended labour strife. Commodity prices have also plummeted to record lows.
The reality is that most SMMEs have not been able to create ‘sustainable businesses’ in recent times, and require some risk capital to help re-ignite or sustain their struggling businesses.

Even with the president’s pledge for government to set aside 30% of certain categories of state procurement for purchasing from SMMEs, cooperatives, township and rural enterprises, economic times will remain tough. There won’t be too many ‘sustainable small businesses’ out there in this economic climate. There will be many who are struggling to pay salaries, fulfil orders and who may be forced to retrench workers – these are the SMMEs that require support now.

Policymakers must create interventions that are driven by the economic realities small businesses operate in, not idealistic notions. What we need is holistic support for small businesses experiencing a tough trading environment in a slow economy, and initiatives to ensure they trade through this climate – perhaps that way, we will get out of this slump with ‘sustainable’ businesses to be proud of.

This article originally appeared in the 26 February 2015 edition of Finweek. Buy and download the magazine here.

Make Entrepreneurship Central to National Policy

This article first appeared in Finweek, 14 November 2013.

 

South Africans often criticise their Government for formulating great policies but failing to adequately implement them. While there have been pockets of brilliance in policy formulation that have served the country well, allowing us to navigate the stormy seas of the global economy, there are also a fair number of policies that have had the unintended consequence of restricting progress. Twenty years into democracy, it is time we wake up from denial and shrug off our protectionist outlook and change what doesn’t work while improve what works.

For starters, we must make entrepreneurship central to national economic policy formulation. I am talking about entrepreneurship, and not SMME development. I am talking about a deliberate national economic policy that seeks to back entrepreneurs and innovators on a serious scale, to create new products and services, access new markets, spawn new industries and, over time, create meaningful employment and grow the tax base.

I am not referring to a drive to support small businesses that remain small and only employ the founder and a handful of unskilled labour. I am talking about the state having a mechanism to identify, develop and fund entrepreneurs and innovators who show great potential for the ultimate benefit of South Africa. I am talking about a mechanism that could have identified an Elon Musk. I am talking about a mechanism that should be developing, supporting and funding a Siyabulela Xuza – the former praise singer turned science and technology entrepreneur.

The good news is that we’ve done this before. It wasn’t as structured as I propose, but it yielded unprecedented results – the benefits of which we still enjoy today. I have told the story of this gentleman before. It is very relevant in the context of how a different outlook can lead to great benefits for the state.

Meet Hendrik van der Bijl. Born in 1887, he graduated from what is today known as Stellenbosch University with distinctions in mathematics and chemistry. After university young Van der Bijl decided to further his studies in Germany. After completing his studies, he met Robert Millikan, the eminent American physicist. Millikan was impressed with the young man and recommended the young scientist to executives from the Western Electric Company. Van der Bijl accepted their job offer and moved to New York.

The first successful transmission of speech by radio was made in 1915. Later that year speech was transmitted by radio over a distance of more than 8 000km. Van der Bijl was the young scientist who managed to get the amplifiers to work to the precise tolerances required over this very long distance. By 1917, Van der Bijl had made significant contributions to the development of the photoelectric cell and by these means, also made a significant contribution to the development of the television.

Back in SA, General Jan Smuts had assumed the reins of power in Government. Smuts believed that a scientific adviser would be an asset to his Cabinet. Van der Bijl was persuaded to return to SA and in 1920 he left the US. He soon started making plans for a public utility to provide the South African industry with cheap electricity. The capital would be provided by the State and the company would be run on commercial lines.

In 1923, the Electricity Supply Commission (Escom, now Eskom) was founded. Van der Bijl borrowed R16m from the State and began putting his plans into action. From the outset the undertaking was a success and within 10 years van der Bijl was able to pay the State loan back.

What we know as Vanderbijlpark today is named after this great South African.

We have an opportunity to learn from our history. We have an opportunity to redefine the ideology and bigger purpose of entrepreneurship in re-positioning our nation as the game-changing economic leader of our continent. Let’s make entrepreneurship central to our economic policy.

Cash Is King

I have recently been fascinated by the specific factors that contribute to the high failure rate of startups. We have seen many reasons for small business failing including poor planning to poor staffing, and ineffective marketing. 

However, if I was to name one main reason for business failures, it would have to be Cash Flow. 

Nothing recently highlighted this fact more than an article I read in The Financial Times of 30 May 2013 entitled"Consumer Giants Turn Screw on Ad Agencies" written by Andrew Edgecliffe-Johnson in New York and Neil Munshi in Chicago. 

The article broke the story of how Europe's biggest advertisers had unilaterally made the call to start paying their advertising agencies up to six months late. A move started by one company and followed by major advertisers in the developed world, caused serious problems for the ad agencies there. 

The article opened: 

"Some of the world’s largest consumer products groups are delaying payments to advertising agencies and commodity producers for up to six months, squeezing cash flows and causing alarm at critical points in their supply chains.

Mondelez International, the former Kraft snack food group, is extending payment terms to 120 days from July 1 – a decision one advertising executive described as “iniquitous”.

Procter & Gamble, the world’s largest advertiser, this month told suppliers it was pushing back payments from 45 days to 75 days, following similar extensions at Johnson & Johnson, the healthcare group, and Anheuser-Busch InBev, the brewer" 

Pause and think about this for a second. 

First of all this is happening in the developed markets of Europe, who are still reeling from a very expensive global economic crisis. 

Secondly, the move to pay these agencies late is driven by the largest advertisers in the market, who are probably serviced by the largest agency groups, meaning that this is likely to affect the entire marketing and advertising industry in Europe. 

Thirdly, a typical ad agency would have 70% of its costs as people, 15% as property and the balance of the15% being administrative overhead. Salaries are due at least every month (some Europeans pay wages every forthnight). 

Paying these business as late as 6 months after rendering services, creates a huge cash flow problem that forces them to borrow in order to finance their operations until the customers pay. 

The article continues: 

“Once a big company like Procter & Gamble goes public with this, it almost gives permission for other marketers to do it,” said Nancy Hill, chief executive of the American Association of Advertising Agencies. “I fear this is just the beginning.”

“Clients are asking us to take on risk like an insurance company and take on debt like a bank,” she added. “Neither of those are what we were set up to do. Our supply chain is largely people. We have to make payroll every two weeks.”

Bob Liodice, chief executive of the Association of National Advertisers, said he was “hearing screams” from agencies, but was aware of only a few that had turned down accounts because of the new terms. “The process began in the recession when cash management was a critical issue but, like anything, once you start it it’s unlikely you’re going to stop it.”

If large agency networks with operations all over the world are "screaming" at the impact of late payments from the world's largest advertisers, what about the small guy? Can you imagine the impact delayed payments have on SME's? 

The cash flow PINCH felt by the agencies quoted in the article above can be a KNOCK-OUT PUNCH for many entrepreneurs who often cannot borrow the funds required to cover their operations until the "big" clients pay. 

I have heard many stories of entrepreneurs who had designed a unique product, and after many years of knocking on doors, finally succeeded in getting it listed with the big retailers. Though you often find their product on the bottom shelf in the 'specials' aisle these entrepreneurs are not bothered by this and often grateful at the opportunity to have their products in store. However, a few months later the realities of selling to big retailers start to hit home. Payment terms from the big retailers can be horrible, and can put an entrepreneur out of business as he needs to cover manufacturing, staff and logistics costs even before he delivers his stock to the retailer. 

Ironically these large retailers are themselves not short of cash as they do not extend credit to their customers, and collect cash immediately when they sell the entrepreneur's product. Government is no different either. 

Entrepreneurs need to keep their enterprises running in order to create jobs. I plead with you big corporates and government: Pay your suppliers, especially the SME's ON TIME!!! 

For us, it is often a matter of life and death! 

AK

What Does Mangaung Mean to Entrepreneurs

In the short time I have been working on the launch of StartUpSA (Twitter: @MyStartUpSA), I have been really encouraged by the many tweets, emails and chance meetings of many people who keep telling us how much we need StartUpSA. Thanks for all the well-wishes and rest assured we are working very hard to deliver a really powerful tool.

The truth is we are a country of very enterprising people. The problem is and has always been that we do not have an adequately enabling environment to harness that entrepreneurial spirit. We have also not promoted entrepreneurship as a real opportunity to address the many social ills created by inequality, unemployment and poverty.

So I decided to take some time out to go though the ruling party’s discussion documents on their policies, as published on its website. I wanted to see whether entrepreneurship would feature at all in the party’s discussions, as just under 5,000 delegates go into conference to decide on the policy direction of South Africa’s nearly 52 million people.

Whether you like it or not, decisions to be taken in the country’s legal capital between 16-20 December 2012 are going to impact you, as an entrepreneur.

So I picked up the “Economic Transformation – Policy Discussion Document March 2012” to try and gauge if Mangaung may deliver any progressive thinking about entrepreneurship and perhaps promoting it out of the obscurity it finds itself into the centre of policy formation and strategic direction of South Africa.

The document opens by stating: “We have an opportunity and an obligation to deliberate on actions which could best enable the economic emancipation of our people”

The Oxford dictionary defines emancipation as ‘the fact or process of being set free from legal, social, or political restrictions; liberation’.

The word “entrepreneur” appears twice and the acronym “SMME” appears 8 times, in a document where the basic thrust and master plan is: In order to get South Africa economically transformed we need a more labour intensive economy. The simplistic argument is that to get South Africans out of poverty, they need to be employed, and for them to be employed the economy needs businesses which rely on employing people. Okay?!

The first time the word “entrepreneur” is mentioned is in the context of the many complex decisions the state would need to make around new ideas and keeping what works. In a way, entrepreneurs are made out to be the alternative to that which has worked over the years. It presupposes that the two cannot co-exist.

“Should we look for new investors in mining in order to open new opportunities for black entrepreneurs, or should we go with more experienced existing companies?” the document questions.

We need to educate our government that there is a big difference between an entrepreneur and a business owner. We need to educate our government that there is a big difference between Entrepreneurship and SMME Development.

The one is a Plumbing business that has hired 15 people in the past 10 years and will continue to hire 15 people for the next 10 years. The other is a malaria testing kit made by two Coloured gentlemen in Cape Town, which currently hires 10 people and because it has signed up an international pharmaceutical is about to build a factory in Goodwood.

One of these is an SMME. The other is an Entrepreneur.

The first time the document mentions “SMMEs”, one can clearly see the confusion:

“The SMME sector plays an increasingly important role as an engine for economic growth SMMEs are a critical source of innovation. They have a higher degree of labour intensity, and tend to adapt more rapidly to changing conditions than larger organisations. They also provide opportunities for aspiring entrepreneurs, especially those who are unemployed. However, SMME’s continue to face challenges of access to finance, markets, support and information. We should target the creation of new firms, especially black owned SMME’s if we are to achieve our employment creation goals”

Here the document is talking about entrepreneurs, not SMME’s. An education is required to enable our government to support Entrepreneurship accordingly.

Whilst I don’t have the privilege of being a voting delegate in Mangaung, I hope to tell anyone who cares to listen that if we really care about the future of this country, we should bring entrepreneurship into the mainstream debate as it provides us a real chance of changing the game and making progress in creating ‘a better life for all’.

Here's to a Ministry of Entrepreneurship. I dream.

AK